Business Breakdowns
· Jeremie Fastnacht
[00:00:00] S1: So Givaudan was founded a long time ago, 1895 – in Zurich by two brothers, Léon and Xavier Givaudan. And at the beginning, it was a perfume factory. There is a small story. A few years later, the local bakery complained because the factory, the fumes made the bread smell like violet. So they were first to move and they went to Vernier, and they were really the pioneer to create synthetic perfume in large quantity because at the time it was only small boutiques and craftsmen. They really got into synthetic. So it's funny because now it's exactly the opposite. Everybody's going into naturals, but at the time it was revolutionary. At the beginning it was a perfume, then they moved with an acquisition, another Swiss company. In 1948, they bought Esrolko to get into flavor. And then in the '60s, the famous company Roche, the pharma company, they wanted to diversify, so they acquired Givaudan. But also another company, Roure, a French company that is legendary in luxury perfumes and naturals. It was based in Grasse, the cradle of perfumery in the Provence. Roche merged the two companies in the '90s, and then in 2000, Givaudan was spun off, listed on the Swiss exchange. They really became the dominant player by acquiring Nestlé Food Ingredients in the early 2000s, and then later Quest International. So big player in flavor and fragrances, which was part of Unilever. So these businesses were outsourcing this complex business. And now it's a bit funny, also the opposite, because some of the companies are now like Unilever or P&G, they are trying to get back by investing in fragrance capabilities. With all that and other bolt-on acquisitions, they are today the leader of this industry. Now they are equally split in revenue, between flavor and fragrances.
· Matt Reustle
[00:00:00] S0: It makes sense to me. Obviously fragrance has an impact on taste. Anytime you restrict your ability to smell and you taste something, there's overlap. But in terms of how these teams operate, you mentioned they moved into flavor with an acquisition. Do those teams and divisions operate very separately?
· Jeremie Fastnacht
[00:00:00] S1: They operate separately, but on the other hand, you have lots of things that are common. If you want to succeed in the industry, you have to get big. You need scale, you need global and local operations, you need tons of R&D and IP. You need trade secrets, deep pockets. You need lots of relationship and trust from the clients. You have to navigate a complex regulatory environment, different in each country and region. You have to manage a vast portfolio of thousands of raw materials and sophisticated global supply chains. This is the same for both businesses. The client issues what they call a brief to explain the product they want to create – describe the brand, the identity, the positioning, the image, the colors. Maybe feelings they want to associate with the products. And they give a given price. So this is the same for both businesses. For example, "Hello, Givaudan, this is L'Oréal. We want to create a new luxury Creed perfume for women. We need a fragrance, something smooth and complex with pineapple, jasmine, and bergamot, and we need it for $150 USD per kilo." Or, "Hello, I'm the founder of a startup, Melvita. I want to create the best premium organic tea. I need a delicious hibiscus flavor, which tastes fresh, natural, healthy. I want it for $5 USD per kilo." So it's a bit the same in, in both cases. What is special is that what you have is the core list. Most of the large meat, food, and beverage and household personal care companies work with the core list systems. It's the list of their very few selected suppliers for several years. Where you usually find the biggest F&F players like Givaudan, and they are guaranteed to be included in all the briefs. But then they are also in competition. So you have 3 or 4 companies maybe in the list. It's a very selective club. You have to pay thousands of dollars just to play. Barriers entry in the industry, of course, are very high. Now, if you go back to the examples, the 2 creation examples, you have the perfumer, the 'nez'. So it means nose in French. Or the flavorists from the F&F company who are the artists, but also scientists because it's very complex. The companies, they have thousands of employees, but the big companies have only a few thousand of these star flavorists and perfumers. They are generously paid. And you have evaluators that help them.
· Jeremie Fastnacht, Matt Reustle
You have chemists, you have food technologists that create a complete product so the clients can really imagine what it would be. And it's very complex because even for a simple flavor – for example, apple – it must fit with the products, the, the specificities of the brief in terms of flavor. Which variety of apple is it? Is it flavor of a fresh, ripe apple? What format is it? What do you need? Liquid, powder? You have to be careful with chemical stability. It must fit with the brand, with the regulation, tons of unique variation. Sometimes it must mask other ingredients. And you have to be careful, because even if you change 1% of a formula, it can change a lot of stuff, not only scent, but the texture or the stability. [00:00:00] S0: Certainly sounds like the chemistry is incredibly important on both sides of the business.
· Jeremie Fastnacht
[00:00:00] S1: You have deep integration, you have symbiotic relationship with the F&F companies and the clients. It's often a partnership. It's a co-creation process. So you have the product manager, the marketing guys of the client. and you have tons of iterations between both. Sometimes for a simple, small client, it can last a few weeks or a few months, but for a high-end perfume, it can last 2 to 3 years. The big players have trusted relationships often built over decades. It's really secret. So they don't tell that a lot of innovation comes from this company. They provide the creation as we've seen, but they also advise and support, in pre-creation. They can do internal testing for the clients. They can do market and trend analysis. They have tons of data. They can do consumer panel testing. They can help on regulatory or marketing stuff. The company then will create a unique compound with a unique reference number for you, for a unique client. It won't be used again with other clients. The IP on these products stays within the F&F company. You see that is very far from commoditized. We heard from an industry expert that sometimes an F&F company cannot replicate the flavor or fragrance of a peer despite having the formula. So it's really complex. That's why you see that these F&F companies, they spend 7 or 8% of sales in R&D. I mean, invest. If you look at the HPC and the food and beverage, it's only 2 to 3%. But it's also different by clients. For example, you have – most of the clients don't have very big capabilities, but you have, for example, as I said, a P&G, they have some internal fragrance capabilities. Or maybe you have a Chanel, they have their own perfumer, so they will only buy the raw materials. The F&F companies, for all the creation, they are working for free. So that's why they keep their IP. They submit their creation, all the specificities, and then the client, in the end, they will do testing with many end consumers. Then they will choose one of the submissions from the F&F and they will award the business to one of them, which will start the production and start making money. It's a bit like a royalty business where you have an upfront cost, but then you have optionality on the successful products, which might become a cash cow for many years.
· Matt Reustle
[00:00:00] S0: My assumption would be that once they win a proposal, so long as that product stays in service – let's assume they win an applesauce proposal for F&F. As long as that product stays on shelves and is selling, I assume that they continue to reap the benefits. You don't see any changes to the formula after that.